The following article is a contribution from Ben Quarmby and Jonathan E. Barbee, Partner and Counsel at MoloLamken LLP, respectively.
Litigation funders have trade secrets on their minds. Since the introduction of the Defend Trade Secrets Act (DTSA) in 2016, trade secrets litigation has been on the rise. Over a thousand trade secrets cases were filed in federal court in both 2021 and 2022. By all accounts, that trend is set to continue. Big verdicts have followed, with some trade secrets verdicts now rivaling the biggest patent verdicts. In the information age, a company’s most valuable intellectual property may not be its patents after all, but the wealth of non-patented, proprietary information surrounding its ideas—its trade secrets.
Trade secrets cases can be more attractive to litigation funders than patent cases. The funding of patent deals is regularly scuttled by patent expirations, validity concerns (especially Section 101 patent eligibility concerns), the threat of inter partes reviews (IPRs) at the United States Patent and Trademark Office, and the perceived focus of the Federal Circuit on reversing the largest patent verdicts that come before it. Trade secrets side-step many of these issues. They do not expire. They are less likely to be sunk by an obscure prior art reference. They are not subject to IPR proceedings. And they are generally not subject to scrutiny by the Federal Circuit. They also offer many of the same benefits to plaintiffs as patent cases: they too can be rooted in invention stories that will resonate with juries and lead to exemplary damages.
They offer their own challenges, of course. Unlike patent cases, there is no “innocent” misappropriation with trade secrets. A defendant must often come into contact with the plaintiff’s trade secrets for a claim to arise. Successful trade secret claims usually require a chain of events that put the trade secrets in the hands of the defendant. Patent plaintiffs do not face those hurdles.
Finding promising trade secrets cases requires identifying the types of companies that will regularly find themselves in situations that lead to trade secret misappropriation: joint ventures, startups seeking investment by larger industry players, acquisition targets, and companies operating in industries with high employee turnover and mobility. And once those cases are found, performing due diligence on them requires a very specific type of focus.
The following steps are critical:
- Identify the Trade Secrets. Ensure at the outset that there are clean, concrete, and well-defined trade secrets to assert. In some jurisdictions, plaintiffs must identify their trade secrets before proceeding with discovery—failure to do so with sufficient precision can stop the litigation dead in its tracks. If plaintiffs can clearly identify the form of the trade secrets (e.g., scientific data, customer lists, product recipes, hard copy documents, etc.), the chain of custody for those trade secrets, and any changes made to the trade secrets over time, their case is far more likely to withstand the test of litigation.
- Verify the Plaintiff’s Protective Measures. Defendants will generally argue that a plaintiff has not taken adequate steps to protect its trade secrets. You need a clean and clear story to tell about the steps a plaintiff has taken to protect its intellectual property. Tangible evidence of such steps—company policies, firewalls, passwords—is invaluable. And there should be a narrow or controlled universe of third parties—if any—with whom the information has been shared. Each additional third party with access to the information can increase the uncertainty surrounding the trade secrets and affect the value of the case.
- Estimate the Value of Trade Secrets. Calculating damages in trade secrets cases can be trickier than in patent cases. It is harder to find comparable licenses or valuations for similar types of trade secrets since trade secrets are just that—secret. There are also fewer established damages methodologies in trade secrets cases. While this allows for more flexibility and creativity in crafting a damages theory, it can also make trade secret damages susceptible to challenges. The Georgia-Pacific factors used so often in patent cases can help determine reasonable royalty rates in trade secrets cases, but courts have yet to adopt those factors as the definitive standard for trade secrets. In conducting due diligence, hire a damages expert to estimate the value of trade secrets before filing a case.
- Assess the Value of Injunctive Relief. Trade secrets cases are often better candidates for injunctive relief than patent cases. Determine the strength of a case’s injunctive relief prospects early on. The likelihood of injunctive relief has to be factored into the economic value of a trade secrets case, since it will directly impact the likelihood of early settlement.
- Determine the Narrative. Storytelling matters in every IP case. But it perhaps matters in trade secrets cases even more so. It is imperative to have reliable witnesses who can illustrate the plaintiff’s narrative in a compelling and clean way. Test the potential witnesses before considering funding. Let them tell their story—and challenge that story—under conditions that will most closely approximate those at trial. Attractive cases should tell a persuasive story about how the trade secrets reflect plaintiffs’ know-how, experience, and competitive edge, and also expose the motives for defendants to steal those trade secrets.
These considerations are a starting point. Due diligence should be tailored to the particular facts and nuances of each potential trade secrets case. Careful consideration of these factors will help ensure that funders make the wisest investments, while avoiding common pitfalls in trade secrets litigation.
